Like other enveloped viruses, HIV-1 uses cellular machinery to bud from infected cells. We now show that Tsg101 protein, which functions in vacuolar protein sorting (Vps), is required for HIV-1 budding. The UEV domain of Tsg101 binds to an essential tetrapeptide (PTAP) motif within the p6 domain of the structural Gag protein and also to ubiquitin. Depletion of cellular Tsg101 by small interfering RNA arrests HIV-1 budding at a late stage, and budding is rescued by reintroduction of Tsg101. Dominant negative mutant Vps4 proteins that inhibit vacuolar protein sorting also arrest HIV-1 and MLV budding. These observations suggest that retroviruses bud by appropriating cellular machinery normally used in the Vps pathway to form multivesicular bodies.